Terra’s Judgment Day, or the great depegging

If you so much as glimpsed at crypto Twitter in the past 24 hours, you know that UST has lost its peg. The LFG reserves are empty.

Terra’s algorithmic stablecoin UST has lost its dollar peg, dropping to lows of $0.67 last night. The crisis sent shock waves across the crypto universe, pushing the Fear & Greed index back into the extreme fear territory and triggering a mass liquidation of assets.

Chart showing UST as it lost its dollar peg
UST price chart over 24 hours. Source: CoinMarketCap

Throughout the past 24 hours, Do Kwon and the Terra team have been in full crisis mode, although Kwon hasn’t been heard from since he tweeted last night that Terra was “deploying more capital,” an unusually prolonged silence from an avid Twitter user.

The turmoil, both that which contributed to the depegging of UST and that which resulted from it, affected other cryptocurrencies as well. Bitcoin dived below $30,000 for the first time since July 2021. As of this writing, the only major coins not in red are, ironically, stablecoins USDC, BUSD, and DAI, as well as TRX.

Targeted attack

The depeg was caused by a targeted attack, LUNA supporters claimed, with a mass BTC and UST dumping actor bringing the value of those assets down to force Terra to spend its reserves with a major loss. Pro bono on-chain sleuths suggested the culprit could have been Citadel, a global market maker, which earlier this year appeared ready to enter the crypto sector.

If those rumors are true, the attack was successful. The Luna Foundation Guard, which was tasked with defending the peg as Kwon led a months-long effort to accumulate Bitcoin, has now emptied all of its three wallets, suffering a loss of about $700m.

Fallout

Meanwhile, Binance decided to suspend all withdrawals of UST and LUNA as frenzied sell-offs resulted in a high volume of pending withdrawal transactions. The exchange will resume withdrawals once the network is stable enough and the volume of pending transactions has dropped, Binance said in a statement, adding that they won't alert users when it happens, likely out of fears that such an announcement would trigger another sell-off.

Crypto Twitter responded to the depeg crisis with a volatile mixture of anxiety, frantic attempts to rally the LUNA community behind Do Kwon’s efforts to restore the peg, and merciless accusations of centralization and fragility of an asset that many used to count among blue chip giants like BTC and ETH.

The crisis upended the crypto community’s belief in the wider Terra project, which has recently celebrated milestone after milestone, acquiring partnerships, developing Retrograde, and making headlines whenever Do Kwon whaled another huge batch of Bitcoin for the LFG reserves.

Even Kwon acknowledged that UST was not really decentralized, reluctantly admitting that his crisis management process bore similarities to the way central banks manage fiat currencies. The decision to deploy BTC reserves was made by the LFG Council, which counts six members, including Kwon himself. Another member is Kanav Kariya, CEO of Jump Crypto, a blockchain building company that has been working on a decentralized reserve mechanism for UST as recently as last week.

What's next for Terra?

Despite the growing volatility and Do Kwon’s unsettling silence, hardline LUNA enthusiasts have stood by Terra, suggesting that the project would eventually recover and that it was now time to buy the dips.

At the time of writing, LUNA was worth $29, down 52% in the last 24 hours. Trading volume is up 157%. As for UST, the peg is far from restoration, but the price has climbed back to the ballpark of $0.90, suggesting that the LFG Council’s defense strategy is showing some results.

The reserves now appear to hold 50.9m UST, 1.69m LUNA, and 1.97m AVAX, totaling $190m.